Tax Planning

11/06/2015

This is the time of year when certain money issues come more into focus, including those related to income-tax planning, charity scams and checking up on the financial health of family members. Tax planning isn't shaping up as anything remarkable over the waning weeks of 2015. Congress hasn't passed any blockbuster legislation affecting individuals this year and, with gridlock on Capitol Hill, might not. That leaves the fate of several popular tax provisions dangling. These "extenders" must be acted on fairly soon or they won't be in force for the coming tax-return filing season. These include a higher-education tuition and fees deduction, a mortgage-debt forgiveness exclusion and a classroom-expense deduction for teachers.

Also up in the air is the optional deduction of state and local sales taxes in place of state and local income taxes, which could impact your decision to make a big-ticket purchase before year's end, a recent Arizona Republic article says. (If you live in a state with income taxes.)

The article, "Time for seasonal planning for taxes, charities, more," notes that one of the extenders in limbo is the option for people age 70½ and older to donate an IRA distribution to charity, rather than include it first as taxable income. This could be an issue for those seniors trying to decide how much of their required minimum distributions to take before the end of the year. A large 50% tax penalty applies on the amount of required minimum distributions that isn't taken.

The capital-gains rules are pretty much the same this year, but some will see some big losses for the first time in a while due to the late-summer swoon in the stock market. Investors are always prudent to look at paper gains and losses in taxable accounts, with an eye on realizing losses before end of the year. If your losses exceed gains, up to $3,000 of the excess can be used to offset ordinary income. Additional losses can be carried forward to future years.

Otherwise, taxpayers generally would be better off deferring taxable income to next year, if they can, while accelerating deductions so they can be taken in 2015. However, that strategy doesn't necessarily play out if you think you'll have much larger deductible expenses next year. In that case, it might be wise to group deductions into either this year or next, if you believe you're not going to qualify to itemize both years. For instance, charitable donations are one type of deductible expense with timing that's easy to control.

Make certain that your gifts count by conducting some research on the groups. Look for non-profits with missions with which you agree and search for their impact, such as the number of meals served, low-income homes built, or animals rescued. Non-profits that are run efficiently are better choices, where most of the money raised is earmarked for programs and not overhead, like executive salaries.

Make sure that the charity is for real. Many seniors are susceptible to giving away their money for reasons such as fear, loneliness, or cognitive problems. Fraudsters prey on these folks.

Be aware of several telltale signs that there might be a problem. Some are obvious, like large, unexplained loans taken out by a senior, or if you see that certain personal belongings are missing. Also, watch for large credit-card charges, gifts to a caretaker, routine bills not being paid, and changes to the person's will or other estate-planning documents.

A sudden increase in spending and atypical, big withdrawals are red flags. Another tip-off is a senior looking to buy risky assets that are out of character with his or her stated investment objectives.

It can be a good idea for elderly folks to sign emergency contact forms—before it's needed—that authorizes a trusted adviser to speak with adult children or other relatives in case of emergencies or if they feel there's a problem. Otherwise, account-privacy laws can stifle this type of communication.

11/05/2015

The death of a loved one can create a lot of financial complexity. For families that have set up irrevocable trusts to facilitate the transfer of assets from one generation to another, the tax implications can be even more complicated. However, there are some basic rules that any heir should know if they get an inheritance from an irrevocable trust.

The Motley Fool recently published an article entitled, "Tax Consequences of an Inheritance From an Irrevocable Trust," in which it noted that generally speaking, whether an irrevocable trust will be subject to estate tax at the death of the person who set it up will depend on the trust's terms and how it was created.

Because an irrevocable trust is typically a separate legal entity, it's not part of the estate of the person who created it. Its creation is usually a taxable gift that requires a gift tax return, which can have implications for eventual estate tax liability. Nonetheless, heirs receive the benefit of avoiding estate tax on the trust asset's appreciation in value.

One caveat is life insurance trusts. If the person creating the trust retained incidents of ownership in the policy (retaining power to change beneficiaries, canceling or transferring the policy, putting the policy up as collateral for a loan, or borrowing money against the policy's value), it will be included in the person's estate—regardless of the irrevocable trust's ownership. If this is the case, estate taxes may be due, and your inheritance could decrease.

The impact of income taxes also depends on the terms of the irrevocable trust. If the trust terminates at the person's death and the trust distributes assets to the heirs, your tax basis in those assets will be that of the trust. Make sure you have detailed information from the trustee before making plans to sell those inherited assets.

But if the trust continues beyond the death of the person who created it, then some complex trust tax rules apply. There may be regular distributions that the trust makes to you which will be treated as taxable income. You'll receive a year-end informational return that shows how much income is taxable and if it's ordinary income, capital gains, or other specialized types of income.

10/30/2015

Seems like the subject of estate taxes becomes part of every politician's election promises, and today's election environment is no different. Even though we are not really expecting significant changes in that area, estate taxes have changed dramatically, and some folks may still be uncertain about how those changes relate to them. First of all, remember that there are two kinds of estate taxes and each can be significantly different from the other in certain ways. What gets taxed? Essentially everything you own (even the face value of life insurance policies where you are listed as owner). The amount of each person's estate that can be excluded from federal estate taxes stands at a whopping $5 million. That means the federal estate tax of roughly 35% would be exacted on any estate valued over $5 million. Another relatively new provision is that married persons, each of whom has the $5 million exclusion, can pass any unused portion of their $5 million to their spouse. This is called "portability."

The article, "Estate taxes explained," from nj.com explains that state estate taxes are entirely different animal: many are not very easy to understand and state laws can differ drastically from state to state. For example, married persons have the flexibility of knowing that they don't have to pay either federal or state estate taxes in New Jersey when one of them dies. This is called the unlimited marital deduction.

But things can get pretty tricky quickly when you own real estate in a state or states that are not your state of residence. When you die, those other states may seek to tax your estate with their own very different state estate tax. A smart way to avoid this issue is to establish a trust to hold that property. The surest way to avoid estate taxes is to give assets away. However, that's a serious step when you might need those assets to provide for you and your family during your lifetime.

Another way would be to create an irrevocable life insurance trust. In that situation, the trust, and not you, "owns" the life insurance, and if life insurance is purchased directly into the trust, there is no waiting period. But if existing life insurance is transferred into the trust, there's a three-year wait before the life insurance is considered out of your estate.

Another way to remove assets from your estate is to establish a 529 Education Savings account with a named beneficiary. With a 529 plan, even though you're the stated "owner" of the account, it's not considered part of your estate.

10/29/2015

In February of 1959, rock and roll musicians Buddy Holly, Ritchie Valens and J.P. "The Big Bopper" Richardson were killed when a plane Holly chartered at the last minute crashed near Clear Lake, Iowa. The event later became known as "the day the music died." Richardson had the flu and talked Waylon Jennings into giving up his seat on the plane. Valens won a coin toss with Tommy Allsup for the last seat. The timing of these two fateful actions altered the course of history for these men and their families. My first memory of playing musical chairs was in kindergarten. Our elementary music teacher taught us not only about music but also unknowingly about competition. When the music stopped, the goal of the game was to be in a position to grab the chair and not be left standing, alone and out of the game. We were taught the "Golden Rule" — to be nice to classmates — but at the same time, the game instilled a conflicting desire to grab that last open chair from a fellow 6-year-old who may not have been quite as quick on the draw. There is a perfect storm brewing in agriculture — specifically regarding transition of assets from one generation to the next. The timing of this perfect storm could be catastrophic for a family farm.

Factors included in this perfect storm include the quantity of farms owned by the older age group, as well as the psychological and emotional issues involved with trying to keep a family institution thriving and in the family. Couple these issues with the amount of capital investment required to continue the farm and the uncertainty of when things will happen, and your farm operation could be in trouble. You need a complete plan, says an article in the Iowa Farmer Today, "Discuss farm estate and succession plans now so no heir is 'left standing.'"

The article advises every farm family to create and review an estate plan and a farm succession plan. These two plans may overlap, but they are two different programs. The estate plan includes documents such as a will or trust, powers of attorney, farm continuation language, executors, trustees, distribution plans, and the age of distribution for minor beneficiaries, as well as contingency plans in the event a beneficiary has predeceased or is disabled at the time of your death. The estate plan includes the coordination of beneficiary designations of retirement plans and life insurance. An important point is to maintain liquidity to pay debts, taxes, or administration costs. This may not be accomplished by simply naming your children as beneficiaries, as many do.

A farm succession plan typically includes the business operating agreements, terms of future purchase, the terms for lease if not purchased, and limitations on ownership. Which of the parts of an estate and farm succession plan will be most important to your family will depend on the timing and what stops the music in the estate.

A key part of any estate plan is identifying ownership and an updated fair market value of the estate assets.

Many folks think that an estate plan just deals with the distribution of assets at death. But an estate plan should identify and discuss strategies for the distribution of any assets that could or should be distributed prior to your death, in addition to those distributed when you pass away.

A good estate plan not only identifies assets but sets out a timeline to distribute those assets with a process that is tax efficient, while keeping in mind the general goals of the estate.

Sharing plans for your estate and business succession is critical for the effective and efficient transfer of the operation. You can avoid some hurt feelings and selfishness down the road if you explain your goals and transparently deal with the heirs whose ideas of distributing your estate may not be the same as yours.

A critical aspect of a succession plan is to identify the method of pricing the assets that adequately represents not only the structure of the business but also the goals of the owner. Another important component of a complete plan is a source of funding when the transition occurs, such as a loan or insurance if the buyout would occur at death. Cash flow is essential for any viable business.

Business succession and estate planning is more of an art than a science. Although there are parts of each plan that are consistent, the real value of an estate and a business succession plan is recognizing the unique issues of each individual situation. There's no "boiler-plate" plan that will work and should be automatically used for every family business. You need to find a way to create plans that fit your distinctive goals.

Sometimes being involved in a farm business without a concrete estate and farm succession plan can be a little bit like playing the game of musical chairs: when the music stops in your estate, don't let your farm heir be the one left standing with uncertainty and confusion—and ultimately find themselves out of the game.

10/15/2015

If you plan on leaving a sizable amount of money to your heirs, it's understandable to be concerned about estate taxes. After all, the top Federal estate tax rate of 40% could take a nasty bite out of a multi-million dollar estate, and that's not including any state taxes that may apply. With that in mind, here are three suggestions from our contributors that could help you lower the estate tax's burden on your loved ones. The estate tax only applies to amounts left to heirs in excess of the lifetime basic exclusion amount, which is $5.43 million for 2015. This includes all taxable gifts given during the person's lifetime. For example, if a wealthy individual dies and leaves an estate worth $10 million to heirs, the amount subject to taxation is $10,000,000-$5,430,000 = $4,570,000.

The Motley Fool's article,"3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes," talks about how the annual gift exclusion lets you pass some of your estate on to your heirs tax-free while you're still around. You want to decrease the value of the estate, and the gift exclusion lets you give money away to your heirs every year.

Because your home may be your biggest asset, you may want to reduce the amount of estate tax you pay on your home, which will be a money-saver for your family. One strategy uses what's known as a Qualified Personal Residence Trust (or "QPRT"). To use the QPRT, you would transfer your home into a trust and designate the length of the trust and the recipient of your home when the trust ends. The QPRT lets you keep living in your home during this period. Although you still have to pay real-estate taxes and insurance, you get the income-tax benefits of home ownership. After the trust ends, typically you can still live in your home, but you'll have to pay fair-market rent to the beneficiaries at that point moving forward. The QPRT is a highly specialized strategy, but you may want to look into it with the help of an experienced estate planning attorney.

State Estate Taxes. Where you live has a lot to do with the amount of your taxes and how much of your wealth ultimately gets transferred to your beneficiaries. Right now there are 15 states and DC that have an estate tax. Every state can have a different minimum and maximum tax threshold and differing exemptions.

If you don't live in Florida and live in one of these 15 states with an estate tax, you should talk to your estate planning attorney about the type of tax liability your estate could face in the future.

10/13/2015

From shirtsleeves to shirtsleeves in three generations, goes the early 20th-century American proverb. Then there's the 19th-century British version: Clogs to clogs in three generations. And from Italy, date uncertain: From the stable to the stars and back again. You'll find similar sentiments in almost every language, all expressing the same thought: It's nearly impossible to pass on family wealth and have it last beyond your grandkids. Statistics back up the folklore. Studies have found that 70% of the time, family assets are lost from one generation to the next, and assets are gone 90% of the time by the third generation. That's because a crucial element of successful inheritances is often neglected. Traditionally, the focus has been on the givers of wealth, but it should rather be on the receivers. Investing assets wisely and crafting a good estate plan are crucial to success, but so is preparing the heirs. "Estate planning is a process to transfer wealth, but it doesn't help the family develop an infrastructure to sustain it, or keep the family unified from one generation to the next," says Debbie Dalton, a Bay Village, Ohio, resident, whose family is learning how to successfully steward the wealth that her father, a chemical engineer, amassed as founder of cryogenic equipment maker Chart Industries.

The recent article in Kiplinger's Personal Finance,"5 Strategies to Keep Your Heirs From Blowing Their Inheritance," explains that preparing the next generation has a lot to do with financial literacy. In addition, it means passing down and putting into practice values that will sustain your family as well as your fortune. A successful inheritance requires parenting and money management – regardless the eventual estate size.

There are a number of challenges that come with a family windfall. Inheritors can lack self-esteem if they suspect that their success stems from their inherited wealth instead of their own efforts. Or they may feel guilty and have trouble accepting good fortune that wasn't earned, and their emotional development can be delayed if they never have to face important life challenges. They can get bored, which puts them at risk for substance abuse or other self-destructive behaviors. Lastly, heirs can get frazzled with too many options or be paralyzed by a fear of losing their wealth.

It's no wonder that rich folks like Warren Buffett and Sting have said they will "spare" their children from inheriting fortunes. They're going to give most of theirs away or spend it. Buffett said the ideal inheritance for kids is "enough money so that they would feel they could do anything, but not so much that they could do nothing." Sting told Britain's Daily Mail last year, "I certainly don't want to leave them trust funds that are albatrosses round their necks." But that attitude is rare among wealthy parents. Most parents don't want to disinherit their kids, but they want a game plan that will not only keep the family assets intact but also keep the kids grounded, healthy, and productive. There are programs to help prepare the next generation for the riches they'll inherit that are more than just money managers' advice.

Get over the money taboo. Family finances are often an unpopular topic of discussion, particularly when the parents think that family wealth might spoil their kids. Young people without preparation who suddenly come into a trust fund when they turn 21 or if both parents die in an accident can go totally out of control, just like some lottery winners. (The same goes for spouses.)

Heirs who are not ready frequently believe that their parents thought they were incapable of handling the information or couldn't be trusted with it. Be up front about the wealth you have and your plans for it.

Embark on a mission. Make sure your legacy is about more than money. Try writing a mission statement, and have family members write down the values they want to emphasize in their lives, such as education, philanthropy or self-sufficiency. This helps the family identify the long-term purpose of their wealth.

Raise money smart kids. Teach kids from an early age about budgeting and saving. Get kids a piggy bank with three slots or three separate piggy banks—one for spending, one for saving and one for giving. Tell grandparents who like to give cash to make them in multiples of three. In addition, allow older kids to budget an allowance to cover their expenses. That means looking at the monthly average spent on his or her car insurance, cell phone, and other "essentials." Give them an allowance to pay those bills. Without a budget, kids won't learn to prioritize or make decisions about money.

Give Your Kids "Financial Training Wheels." Don't wait and withhold all access to the family fortune in order to preserve it. Seed an investment account when children are in their late teens and let them make investment decisions and agree to match a percentage of the returns earned over a specific time period. The child can withdraw money from the account, but the parent can't add to the principal, which will teach them about investing and spending. It will also show them the power of compound growth as well as the opportunity cost of robbing a nest egg.

Assemble a good team. In addition to an experienced estate planning attorney, bring in mentors for the next generation, such as board directors and other successful businesspeople. This de facto advisory board is nice when your kids' friends and classmates start asking them for contributions to investment schemes or business start-ups. They want to help their friends, but the best way is to defer… so if the committee says "yes," they're a champ. But if it's "no," then it's not his fault.

You'll have the best chance of preserving both your wealth and your family with a multigenerational effort that starts when your kids are born, not when you die.

09/24/2015

Skilled estate planning is essential to the tax-efficient transfer of the family business across the generations. While the majority of family business owners have estate plans, the majority of these plans can be considered dated. Family businesses are responsible for more than 70% of global production and are one of the principal creators of private wealth. Often critical to the continuity of the family business and to the perpetuation – if not enhancement – of family wealth is estate planning.

Forbes’ article, “Most Family Business Owners Should Update Their Estate Plans” reports that an international survey of 336 middle-market family businesses found that more than 90% of family members who are senior executives with equity in the firms have estate plans. That’s the good news. Now the bad new: only 22% of these estate plans have been updated within the last two years. About a quarter of them have been updated between two and five years ago, and the rest—almost half—have not been reviewed in over five years.

Most estate plans become “old” after a few years. This means that situations change, such as family relationships, business matters, and their net worth—making it prudent to review and potentially refine their estate plans.

In addition to out-of-date estate plans, the quality of these plans must be questioned, as some family business owners don’t take advantage of strategies to reduce estate, gift, and other taxes. In some situations, there are ways to improve the financials of the business and provide economic benefits to the family at the same time.

09/17/2015

When you dare to think ahead to the last days of your life (if you dare to think about that), what do you imagine? If you are like 70 percent of Americans, you dream of spending your final days at home, in peace and comfort, surrounded by loved ones who care for you compassionately until your last breath. But in reality, the CDC reports that 70 percent of Americans actually die in a hospital, nursing home or long-term care facility. Why are so few people able to realize their end of life dream?

The two biggest reasons that many people do not have the death they wish: many do not plan ahead, nor do they make their wishes known, according to The Huffington Post’s“5 Reasons to Plan Ahead for the End-of-Life.” No one likes to talk about death, so we put off conversations that would let others know of our desires. And most of us don't take the time to work on required documents to establish a legal basis for our wishes.

There are some very compelling reasons to overcome your fears and get going on this. And it's never too early to start planning: remember there are no guarantees for the future.

Five reasons to start planning for the end-of-life now:

1. Preserve Your Financial Legacy. According to a recent survey, roughly 41% of Baby Boomers don't have a will—and 50% of all Americans die without a legal will in place. If you fall into either of these groups, it means that the probate court will decide how and to whom your assets may be distributed among your heirs, according to Florida law. If you have no estate plan and don’t discuss a strategy with an experienced estate planning attorney, you may give a significant portion of your estate to taxes. Protect your assets and distribute them to your heirs by creating an estate plan.

2. Provide for Your Minor Children. That same survey found that 55% of Americans with children don't have a will and have failed to designate a legal guardian for their children under 18. Here again, the court may decide who will receive custody of the children if both parents die—a traumatic event for everyone. Take the necessary steps now to name a guardian and protect the welfare of your children.

3. Get the Care You Want at End-Of-Life. Another survey continues the bad news: less than a third of Americans have completed advance Directives—instructions to health care professionals on the type and extent of care to be delivered in a life-threatening situation. Without this, you stand to receive aggressive, full treatment in a crisis, which may not be what you really want. Complete a Health Care directive with instructions for your health care at the end-of-life. This will save energy, resources, and create less stress for your loved ones. Make sure the documents are in your home and easily accessible, should an emergency arise.

4. Be Remembered as You’d Like. If you would like to be memorialized in a certain way, you need to make your wishes known to your family in order to have them executed. Yes, you should stage-manage your own funeral! Write down the arrangements in advance for your own funeral and leave detailed instructions.

5. Alleviate stress for your family. There’s plenty of grief with the loss of a loved one without adding conflicts about handling financial, health care, or after-death arrangements. Communicate your wishes clearly now with detailed instructions and draft the required legal documents to ensure your desires are met.

09/16/2015

As the fall wedding season begins, advisers should make sure they have a comprehensive plan to help clients who are getting married. Advisers need to look at the big picture, like if the couple's retirement goals align, and the nitty gritty, such as insurance policies and estate plans that need updating. The process should start when the couple gets engaged. Just as an architect wouldn't go into an initial client meeting with blueprints, an adviser should get to know a client's spouse-to-be first before creating a plan.

A cleverly titled article in Reuters, “When financial planning meets wedding planning,” notes that a financial adviser or estate planning attorney should analyze each person's financial holdings, insurance coverage, risk-tolerance levels, retirement goals, and any current estate plans before the wedding takes place. Questions to get some clarification about the relationship include:

Who is going to pay the bills?

How will you plan for big purchases?

When are you planning to retire and where?

If there are children from a previous marriage, how will inheritances be handled?

If the couple has two advisers or attorneys, things can get overly complicated without careful communication; in some cases it can be best if the couple agree to work with one advisor or attorney.

Then there is the sensitive issue of a pre-nuptial agreement, which is typically easier to do with those on their second marriage. If you are younger, childless, and in love, you may believe that it’s not necessary. Talk to your estate planning attorney about the benefits of having this, and then think about it.

Whatever the decision is on the pre-nupt, make sure you talk to your estate planning attorney about updating or creating your estate plans. Couples should go to that meeting with printouts of all of their financial statements and insurance coverage.

Finally, after the wedding, update beneficiary information. This will include insurance and retirement plans. If a spouse has changed his or her name, your attorney can help you update your social security card, credit cards, and passport.

09/09/2015

One of the most important things someone can do to best ensure their estate is handled without a hitch is to appoint the right person as the estate’s executor, called a personal representative here in Florida. So what do you need to do if you’ve been appointed an executor of someone’s estate? Being selected as an executor is not only an honor, but a responsibility to the person who named you, as well as to his or her heirs. It’s also a complex job, requiring working with many types of professionals. And the duties can last for a considerable amount of time, even years, depending on the complexity of the estate. All executors receive a stipend or “commission” paid from estate assets for their services.

A recent Forbes article, titled “What an Executor of an Estate Needs to Do,” says that if you’re appointed to be an executor, you should work with an experienced estate planning attorney to help you through the steps in settling the estate.

When settling an estate, an executor is in charge of these basic functions:

Locating, collecting, and being responsible for the estate’s assets until they are distributed to the beneficiaries.

Paying the decedent’s debts and estate administration expenses.

Handling tax matters, including filing the decedent’s and the estate’s income tax returns and paying the income taxes, if any.

Distributing the remaining assets in accordance with the terms of the will.

The financial responsibilities of an executor mean that he or she must make an investment analysis of all assets in the estate to determine which to sell and how the estate’s cash needs will be met. The majority of the administrative work in handling an estate is recordkeeping.

The executor must first arrange for his or her court appointment in probate court to obtain “Letters” of Administration which permits the executor to represent the estate to third parties such as banks and financial companies to collect, liquidate and distribute assets and other tasks. The executor must compile information about the decedent’s finances and then sell or divide certain assets among those named to receive them in the will or to pay taxes.

In addition, the executor must cancel the decedent’s credit cards, have utilities turned off and pay expenses such as rent, taxes and insurance premiums. Home repairs or maintenance may also be needed. The executor will also need to open an estate bank account to hold the collected assets. These funds are used to pay the bills.

You do not have to act alone. In fact, Florida law requires that personal representatives work with a lawyer. Choosing an estate planning attorney who regularly handles probates can be a huge help with this process to ensure that everything is done right and that the decedent’s estate is settled in an efficient manner. Please contact my office and allow us to help you.